Kiwi strengthens ahead of rate review

THE New Zealand dollar has extended its gains across all major currencies ahead of the Reserve Bank hiking rates for a third time this year, as traders speculate the central bank could be less dovish than the market is pricing.

The kiwi rose to 85.50 US cents at 5pm in Wellington from 85.21 cents at 8am and up from around 84.88 cents late on Tuesday.

The trade weighted index traded at 79.79 from 79.54 at the start of the day.

The Reserve Bank is poised to raise the official cash rate to 3.25 per cent on Thursday morning, although opinion is divided on whether governor Graeme Wheeler will affirm the 200 basis points of tightening in two years he projected in March or project a lower track.

Traders are betting the central bank will hike rates by about 96 basis points in the next 12 months, implying four quarter-point increases, although Mr Wheeler may pause after Thursday's expected uplift.

"The rhetoric is the important part. Nobody is going to be overly concerned about the rate hike. The market is pricing a 35 per cent chance of a rate hike at the July meeting, and maybe that is being a little bit under-priced."

The kiwi extended its three-week high against the euro, rising to 63.17 euro cents from 62.91 at 8am and from 62.54 cents at 5pm on Tuesday.

The European Central Bank last week cut its key deposit rate to negative and introduced further stimulus in an attempt to bolster economic growth and ward off the threat of deflation.

The New Zealand dollar traded at 91.08 Australian cents from 90.90 at 8am and rose to 87.44 yen from 87.21.